Indian central bank may cut rate by 0.25% in policy review

New Delhi: Reserve Bank Governor Urjit Patel is expected to again go in for a 0.25 per cent interest rate cut at its next policy review on Wednesday, with an aim to cushion the impact of demonetisation, a majority bankers feel.
This will be the first monetary policy review after demonetisation of old Rs500 and Rs1,000 currency notes following which banks witnessed surge in deposits.
Patel, in his first policy as RBI Governor, in October reduced the repo rate (short term lending rate) by 0.25 per cent to 6.25 per cent. This will be the second policy which will be based on recommendations of the Monetary Policy Committee.
RBI has cut repo by 1.75 per cent since January 2015.
Canara Bank MD and CEO Rakesh Sharma said that with softening of inflation, "we expect that RBI may go for a 25-basis point rate cut in the upcoming policy".
Echoing similar views, IDBI Bank CFO R K Bansal said the central bank would ease the repo rate to 6 per cent.
"The new two quarters are very important and they would like to see the impact of demonetisation," Bansal said.
In order to manage liquidity conditions, RBI on November 28 had asked banks to maintain an incremental cash reserve ratio (CRR) of 100 per cent on deposits accrued between September 16 and November 11, 2016.
The temporary hike in CRR due to high deposits with banks is not a concern, but RBI should cut repo by 0.25 per cent to 6 per cent in next policy review in December to adjust balance between high liquidity and interest rates, Yes Bank said.
According to SBI, there is an expectation that the inflation in November will be below 4 per cent.
In October, retail inflation was at 4.20 per cent while wholesale inflation eased to 3.39 per cent.
"Also, the recent demonetisation will support easing inflation by affecting consumer demand adversely. Hence, we are still expecting another round of repo rate cut by 25-50 basis points (0.25-0.50 per cent) in 2016-17," a senior SBI official said.
Last week, RBI hiked CRR to 100 per cent on the incremental deposits on a temporary basis to suck out excess liquidity after deposits of Rs500 and Rs1,000 notes following their withdrawal.
The Citi, in its report, has said RBI may revise its 2016-17 GDP growth forecast substantially from 7.6 per cent earlier and cut repo rate by 25 bps repo to arrest the downside risks to growth.
Industry chamber PHDCCI feels that as the process of demonetisation has created tremendous liquidity, at this juncture, "RBI should cut repo rate in line with cut in deposit rates" in the policy.
"Industry, businesses and people are facing the impact of higher interest rates for the last many years," said PHD Chamber of Commerce and Industry President Gopal Jiwarajka.
HSBC, in a report, said expectations of lower growth and inflation solidify its 25 bps rate cut call for the current fiscal year.